Union Government as part of providing stimulus to the manufacturing sector reduced excise duty from 14.42% to 10.3% and then subsequently to 8.24%. Whether this has the desired effect on the economy with increased demand due to lower prices of manufacturing products is debatable as there was no substantial changes in economic growth. On the other hand lower excise duty has affected revenue of the Central government as lower collections on excise front has increased fiscal deficit for the year. With union budget around the corner on 6th of July there is lot of talk on increasing excise duties again. I do not think this increase in excise duty will affect manufacturing industries as price increase due to increase in excise duty will not have a negative effect on demand and consumption as this will be quite marginal to an effect of 2% to 4%.
The challenge facing manufacturing industry due to these frequent tax changes is changes in their software handling billing, accounting, legal compliance etc. There will be a huge transactional cost on this front and this again will have to be passed on to the consumers.
Last month the UP government introduced a new component in their VAT tax called SAT of 0.5% over and above the VAT rates. This needed immediate change in software of all manufacdturing companies, again added to costs.
Urgent need of today is not tinkering with tax rates but tax reforms in a large scale like immediate implementation of GST so that tax management is simple and cost efficient for corporates and they do not pass on this cost to consumers.
Tax Reforms will bring down costs and not Tax Tinkering.
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